Keep The Faith. Patience To Bear Fruits Soon

Investors' pain has intensified as Indian markets have underperformed their global peers. Yogesh Supekar and DSIJ Team identify what is haunting the markets and explain what is the best any investor can do in such testing times



With Sensex slipping below 37,500 and touching five-month low and Nifty Midcap index touching 30-month low, investors who were already sombre are now feeling frustrated. But wait, isn’t it good news that the stocks prices have finally fallen and that the valuations have started to look attractive after a long-long time? Up till now, what most of the investors argued is that the valuations are stretched and the earnings are not supporting the premium valuations--well, now we have the prices dropping AND attractive valuations. Is valuation attractive enough for investors to start investing? This is the most important assessment here. If we first look at what is happening in the auto space, we find that almost all of the auto stocks are trading on an average 20 per cent below their respective 200 DMA (daily moving average). This is indicative of extreme weakness in the sector. Technically speaking, in the short term at least, one can definitely expect some sort of pull-back in these set of stocks. For any long-term investor who has an investment (portfolio) horizon of at least 5 years, it is times like these that provide contrarian opportunities. Investors first need to understand what is plaguing the markets and in which sectors can the situation deteriorate from hereon.

What is bothering the market?

Market, first and foremost, is worried about the economic slowdown and is struggling to see the much-touted fastest growth rate in the world for the Indian economy. Secondly, the government’s decision on taxing the super-rich and also levying taxes on share buybacks have not gone down well with the investors in general. The sentiment has further become bearish owing to such announcements. The foreign portfolio investors are not happy with the stringent rules imposed for accessing the Indian markets. The selling in Indian markets intensified after budget announcements. The auto sector, which constitutes a huge chunk of the manufacturing GDP of India, is reeling under pressure and is clearly going through one of the most disruptive phases ever. The much-anticipated fiscal stimulus was not announced in the recent budget, which has disappointed several investors. The NBFC crisis continues to remain a headache for the current government. The liquidity crisis persists even as the perception remains that the current government has not done enough to resolve the issue, even though the steps taken so far may ease the crisis to some extent. The Q1FY20 results so far have not enthused investors and the slowing economy does not promise a better quarter next earnings season either.

The global economy is growing at a slower pace and the money flows are getting concentrated in developed economies. According to one of the market reports by a leading global investment bank, the differences in relative strength of labour markets and the economic growth between the countries have led to large divergences in global monetary policies, leading to interest rate differentials and large currency moves. This phenomenon has incentivised capital flow into the US, thereby leading to the strengthening of the USD. This has essentially exposed the weakness of the emerging markets, including India. Gone are the days when the emerging markets used to hunt alpha. Now, the alpha haunts the emerging markets. The de-globalisation trend, growing nationalism and trade war fears may act as strong headwinds for the emerging markets going forward.

Market is weak: Now what ahead?

Time and again markets have surprised investors with their ability to recover in the longer run. The current spell in markets, where the broader markets are underperforming since the beginning of 2018, may not be the longest one in the history of Indian markets, but surely it could be one of the most damaging ones.

With such huge number of stocks already underperforming and having corrected by more than 50 per cent in general, the investors' sentiment is at an all-time low. 


If we look at the market’s performance on a YTD basis, we find that the story in CY19 is more or less similar to the situation in CY18. Some select counters of Sensex and Nifty are pushing the indices higher, while the broader markets continue to sulk.



If we consider all the negatives that have impacted the markets, it does look like most of the negatives are factored in by the markets and it is only a matter of time that the markets form a base and start discounting the growth afresh. The risks that remain are a global economic meltdown and further slowing of the Indian economy.

The markets worldwide have factored in a slowing global economy. The Indian markets have discounted risks emanating from companies with record of poor corporate governance. Also, the markets have discounted the fact that the ratings downgrades are much more than the ratings upgrades. The markets also seemed to have taken the taxes levied by the Government of India in their stride. The fact that the Indian markets have underperformed their global peers on a YTD basis can be comforting for those investors who want to deploy fresh money into the Indian markets. It does look that most of the negatives are factored in and the markets may react negatively only to some contingent event.

  

The GDP growth is expected to be back on track sooner rather than later, there is above average monsoon this season, FMCG companies are expecting the rural demand to pick up by December this year, the lowering of interest rates may help solve the liquidity crisis in India and, most importantly, the valuations are getting attractive every time the prices are seen correcting. Seasoned investors would argue that some of the best times to invest in the markets is indeed when the market sentiment is at an all-time low.

Says Ramesh Bora, a seasoned investor who has seen several corrections over the past couple of decades, “I have witnessed the market crash of 2008 and have sailed through the correction of 2010 and again in 2015. The Sensex stocks on an average corrected by 50 per cent in the 2008 crash. The Sensex constituents corrected by almost 17 per cent on an average between October 1, 2010 and December 16, 2011, while the Sensex stocks on an average corrected by 15 per cent during February 2015 and February 2016. All these three market corrections were triggered by different reasons and the economic challenges faced during those times were also different. What is common though in all the corrections is what happened with the Sensex constituents post correction. After the 2008 correction, the same Sensex constituents which fell by nearly 50 per cent generated on an average 160 per cent return in one year, 241 per cent return in two years and 290 per cent return in three years post the correction period.

The Sensex constituents that averaged negative 17 per cent return in 2010 correction generated 39 per cent return in one year, 56.42 per cent return in two years and 129 per cent return in three years time frame post the correction period. The post correction returns are similarly impressive when the Sensex (market) corrected in Feb 2015.

I have no doubt that the stock prices will recover from the current levels. No one can tell when the correction ends perfectly, however when the sentiment is at near all-time low, I know the market bottom is nearby.”

Vijay Kedia,
Ace Investor

"With 1.3 billion population, one cannot go wrong on India consumption story"

How often do we come across this question 'when's the right time to invest'? According to you, is this the right time to invest in the stock markets?

We come across such situation twice in a decade. 2002, 2008 and 2013 are the recent examples. Now the same situation has come in 2019. People in the market have short memory. Unless you think Indian economy is going to be stagnant like other European countries, this could be a good time to invest, similar to 2008.

You have seen most of the market ups and downs, but what we are experiencing now is it a rare event, where such a large number of stocks are underperforming the key benchmark index for so long, or it has happened in the past as well?

It has always happened. In the mother of all past bull markets of 1994 to 2000, majority of the stocks from the old economy did not perform. Only IT stocks ruled the entire bull market. In the father of all the bull markets of 2003 to 2008, many sectors such as pharma, FMCG and IT did not perform. Hindustan Unilever was a laggard. Between 2008 and 2017, pharma, FMCG were star performers. Infra companies and banks were the darling of the market between 2003 and 2008 and went bankrupt by 2016. Sectors move on rotation.

There is the much talked about earnings recovery that we heard in the past three to four years. When do you think we will see a concrete earnings recovery?

Moderate earning recovery is there in many stocks. People do not notice. A rising economy does not mean 20% earnings growth every year. Even 10% growth is also a growth. So in the ten-year time period, a stock grows, say, 10% for 5 years and then say 20% for other 5 years, that's a decent earning average.

It was not long back when everyone was talking about 'the great India consumption story', but now the tone has completely changed. What is your thought on India's consumption story?

The economy is slowing down. The sentiments of businessmen and investors are at an all-time low. How can you expect them to keep the same tone. However, with 1.3 billion population and 1% plus growth in population YoY, one cannot go wrong on the consumption story. Having said that, they are very expensive. Remember, as I said, Hind Unilever did not perform between 2003 and 2008 and, after that it went up more than 10 times.

Time Correction

Whenever the stock prices remain stagnant and do not move anywhere for long periods, e.g three years, it is called ‘time correction’. In the phase where the time correction is ongoing, there is no explicit fall in the value of the asset. The value remains unchanged, however the investors have implicitly lost time value of money. Investors would have been better off parking the money in bank accounts as the interest earned on deposits means the return on investment is greater than zero. Investors lose money implicitly and since the correction was caused by the passage of time, it is called a ‘time correction’. Investors are impacted by time correction the most when they are highly leveraged. What leverage does is it amplifies the rate at which investors burn money in case of time correction. Hence, for the leveraged investors, understanding the concept of time correction is extremely crucial.

We don't have to be smarter than the rest. We have to be more disciplined than the rest.

Conclusion

The way the financial markets are positioned right now, it is almost a given that the volatility is going to be higher in the coming months. The correlation between the global equity markets may be lower and the divergences between economies and assets could be more pronounced, which is in sharp contrast to what happened in 2017. In such testing times when we are facing both price and time correction in the Indian markets, every investor should keep an eye on the long-term potential of the markets. In declining as well as rising markets, it is important that investors exhibit discipline and stick to their long-term strategy. Sticking to the plan and following a long-term strategy is often most difficult in weak markets; however, it is markets like these that can create extremely lucrative opportunities. The sentiments are but slaves of underlying fundamentals and the underlying fundamentals are likely to improve from here, albeit slowly. The Indian economy is strong structurally.

In the weak markets, it is normal for investors to chase quality. This means that large-caps will be the preferred option for many investors, including FPIs and DIIs. It also means that global money may flow to the US more than to the emerging equities. But this could be a short term phenomenon, and as the growth improves in the Indian economy, we can expect institutional money chasing Indian equities.

Market consensus is also building around the small-cap and mid-cap stocks that have underperformed in CY19 after a dismal performance in CY18. The consensus seems to be that the turnaround is just around the corner for these set of stocks. This is one area where the opportunities will emerge as soon as the liquidity problem subsides in India. Historically, small-caps and mid-caps have done well whenever there has been sufficient liquidity in the markets and the economy in general. 

Every year, you will find a peculiar theme dominating the market moods. If it was Goldilocks situation (moderate economic growth characterised by lower inflation and marketfriendly monetary policy) in FY18 and trade war and interest rate tightening in FY19, it is definitely the economic growth story that is dominating the market mood in FY20. As soon as the GDP growth data starts bottoming out, the equity prices can be expected to pop up. It is safe to say that we are close to making a bottom in the near term and the long-term investors can use this opportunity to generate alpha for their portfolios. Start accumulating now and hunt for value for better returns from your future portfolio.